What Is A Domestic Asset Protection Trust and How Does It Work

It may be no secret that we live in a litigious society. Business owners, people worried about an expensive divorce, working professionals who operate in a legally treacherous environment, and others are all potentially at risk of devastating lawsuits. Did you know, however, that a Domestic Asset Protection Trust is one way to protect yourself?

Defining Domestic Asset Protection Trusts

First, it is important for you to know that there are many types of trust agreements that you can create and use with your experienced Florida estate planning attorney. Normally, under most state laws, asset protection doesn’t extend to individuals who place their assets into a trust where they also stand as beneficiaries. These trusts are commonly referred to as “self-settled trusts.” A Domestic Asset Protection Trust, however, is an exception to this.

A Domestic Asset Protection Trust, or DAPT, is a complicated legal arrangement that protects the assets you put into it if the trust is properly established. A DAPT is a unique type of irrevocable trust. It is both “self-settled” and “spendthrift,” meaning the grantor, or trustmaker, can be a trust beneficiary, and the trust’s design prevents beneficiaries from assigning the assets to outside creditors.

Evolution from Foreign to Domestic

DAPTs were created about 23 years ago as an alternative to Foreign Asset Protection Trusts. Prior to DAPTs, people at risk of creditor judgments from court proceedings were putting their personal assets into protective overseas trusts in places like the British Virgin Islands and the Cayman Islands, if they could afford to do so. Now, DAPTs offer many of the same protections but in a way that is more cost-effective and more accessible.

Navigating State Jurisdictions

There is, however, a catch to this form of strategic estate planning. Only about 17 states currently allow them. You can still establish a DAPT in a permissible state if you live in a non-DAPT state. It just gets riskier in a dispute. For example, if you establish the trust in a permissible state, your assets are in another, and you live in yet another state, there could be plenty of confusion over which state laws apply. Delaware, Alaska, Nevada, and South Dakota have the strongest DAPT laws, but trustees must reside in the same state where the DAPT is established.

Timing and Asset Protection

The period of time that the assets remain in trust is also important. A short time frame between placing an asset in trust and a creditor claim could weaken protections. If it is too short, then a creditor could even claim a “fraudulent transfer.” It is recommended to fund a DAPT proactively with assets that have long-term need horizons. In other words, the longer the assets are held in the trust, the better. Make sure, however, that you will not need them immediately for pressing financial needs.

Limitations and Exceptions in DAPT Asset Protection

There’s also the matter of DAPT limitations and exceptions. In every state where Domestic Asset Protection Trusts (DAPTs) are recognized, there’s a specific time frame during which the protection for assets comes into effect. This means that placing assets into a DAPT doesn’t provide immediate protection from claims by creditors. Additionally, a DAPT typically can’t be used to evade liability for a claim that was already pending when the DAPT was set up. The length of time needed to attain full protection varies from state to state, and it’s different depending on whether the creditors are known in advance or not.

Some of the states that have passed laws allowing DAPTs have included certain rules in their statutes. These rules permit specific creditors to challenge the trust’s protections even if the allotted time frame has elapsed. The rules for these “exception creditors” are present in the DAPT laws of Alaska, Delaware, and South Dakota. These rules usually include exceptions for property settlements in divorce cases, alimony, child support, and creditors with pre-existing claims. However, this list is not exhaustive. It’s crucial to make sure that a DAPT you establish will indeed fulfill its intended purpose of safeguarding your assets before proceeding.

Inheritance Benefits of a Domestic Asset Protection Trust

Domestic Asset Protection Trusts are growing in popularity as more and more people recognize their potential in safeguarding assets. The added advantage is that such protection paves the way for a greater transfer of wealth to heirs upon the grantor’s passing. By minimizing creditor claims, more resources can be preserved for your beneficiaries.  

Considering these benefits, should you include a DAPT in your estate plan or asset protection approach? As is often the case with such decisions, the response is, “It depends.” Although creating a DAPT can provide substantial advantages, it might not be suitable for everyone. The effectiveness of a DAPT can vary depending on the specific liabilities you aim to safeguard against. Our attorneys are here to assist you in determining whether establishing a DAPT aligns with your circumstances. We encourage you to reach out to us for a confidential discussion regarding your legal requirements.

If you or someone you know would like more information, get in touch with our office to schedule a meeting.